Rolling the Dice: When Does Tax Avoidance Result in Tax Uncertainty?
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Edward L. Maydew
University of North Carolina at Chapel Hill
January 5, 2014
We provide initial evidence on the relation between tax avoidance and tax uncertainty, where tax uncertainty is the possibility of losing a claimed tax benefit. We find that tax avoiders, i.e., firms with relatively low cash tax rates, bear significantly greater tax uncertainty than firms that have higher cash tax rates. We also test hypotheses about the determinants of the relation between tax avoidance and tax uncertainty. The data reveal that tax avoidance associated with research and development (R&D) is particularly uncertain. Moreover, the increased uncertainty from R&D-related tax avoidance is concentrated in firms with high tax haven intensity, suggesting that cross-border income shifting and transfer pricing are important determinants of the relation between tax avoidance and tax uncertainty.
Number of Pages in PDF File: 46
Keywords: tax avoidance, tax uncertainty
JEL Classification: M41, H25
Date posted: January 6, 2014
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